We use cookies to customise content for your subscription and for analytics.If you continue to browse Lexology, we will assume that you are happy to receive all our cookies. For further information please read our Cookie Policy.

Compromise agreements - warranty that no breach of contract

What should the employer do if, after signing a compromise agreement in which it agrees to pay a large sum of money to a departing executive, but before making the payment, it discovers that the individual committed a repudiatory breach of contract which would have entitled the company to terminate summarily? This is essentially what occurred in Collidge v Freeport when the company became aware of various acts of misconduct, including misuse of a company credit card, removing company equipment and claiming personal expenses as company expenses only after signing a compromise agreement. However, the company had not yet paid out the severance sums agreed under the agreement. The High Court's decision in this case turned on the precise drafting of the compromise agreement. The key clause included the following:

"You warrant as a strict condition of this agreement that as at the date hereof:…. there are no circumstances of which you are aware or of which you ought to be aware which would constitute a repudiatory breach on your part of your contract of employment which would entitle or have entitled the company to terminate your employment without notice…".

On this basis, the Court held that the company was entitled not to make payments under the compromise agreement which were conditional on such a warranty. Although, importantly, the parties would continue to be bound by the other terms of the agreement so the company retained the benefit of the waiver of claims and other important provisions on confidentiality.

This case was slightly unusual in that the company discovered that they had grounds for summarily dismissing the individual only after entering into the compromise agreement but before actually making payment under the agreement. However, in practice our view is that, it would be advisable to make compensation for loss of employment conditional on a warranty from the executive that, so far as he is aware, he has committed no breach of contract or breach of duty (including fiduciary duty) to the Company.

Compare jurisdictions: Employment: USA

“I find the articles on the Lexology newsfeed very relevant and up to date on a variety of topics of interest to my areas of practice. The authors are reliable and current on the topics about which they opine. Even when several law firms write on the same topic, I can often glean new viewpoints and perspectives from the different firms. The headings are also helpful because they briefly and accurately describe the topic and enable me to quickly and efficiently decide what I may or may not want to read in more detail."